Everyone wants to be financially free or as Robert Kiyosaki states, “to get out of the rat race”. As Real Estate Investors or full time self-employed entrepreneurs, we pay taxes often and in large amounts. I encourage clients to avoid using what some would say are tax scams but instead reduce their tax debt by paying the correct amount on taxes instead of over-paying them. How is that done?
Taxpayers can reduce their current business and personal tax debt and gain income that can be re-invested in real estate or applied to long-term retirement plans. The road to increased tax savings is to audit proof your expenses through a well-documented system using a six-column tax diary, organized files and a reimbursement log.
The “burden of proof” is the taxpayer's responsibility to the IRS. IRS examiners are not required to help you keep your records. The consequences of not following the IRS tax guidelines are huge to the taxpayer. Possible actions are one-half of one percent a month delinquency penalty during the period that you fail to pay the proper amount taxes, 20% of underpayment attributable to negligence, disregard of the rules, and unreasonable deduction claims. Additionally, 75% of any underpayment attributable to fraud and loss of deductions on interests paid to the IRS, if they were due to a business deduction on your Schedule C.
Tax Records For Real Estate Investors
My tax record system for real estate investors shifts the burden of proof from the taxpayer back to the IRS. How is that possible? Three separate and distinct tax records are used: permanent files, regular files and a daily tax diary. This applies to all forms of business entities: “S” corporation, “C” corporation, LLC, or a sole proprietorship.
Permanent Files are the prior year's tax returns, real estate purchases and sales, stock buys and sales, all rent and lease option payments collected, property repairs, management and maintenance fees, equipment/appliances purchases and sales, and similar entries. Generally, you want to keep any record that relates to more than one tax year in your permanent file including property purchase documents, closing statements, deeds, and other related expenses.
Regular Files are time sheets, part-time help records, receipts, invoices, canceled checks and other comparable evidence.
Daily tax diary is the most important of the documentation system. This consists of a permanent record that is separate from the receipts you keep for each item. Details of expenses are logged into six columns labeled who, what, when, where, how much and mixed deductions. Examples of items for the six-column tax diary are pictures of your office (showing that it is separate from your living area), a printout from your realtor showing comparable cost of office space in your area, meal receipts for business dinners and training expenses, and auto expenses for mileage. Keep your plane tickets, parking and cab receipts (especially if over $75), and the training materials from the Real Estate events attened to log in ans support travel expenses.
Other elements to tracking expenses are a separate business checkbook with a three-part check and a reimbursement log. The three-part check method is to send part one, the original of the check to the vendor; staple supporting evidence such as receipts or invoices to part two of the check and file it alphabetically in the vendor file; and to file part three in a numerical file for later reference. A reimbursement log tracks cash outlays and reimbursement expenses by date, description and amount.
Keeping a good documentation system is a worthwhile investment of time and consistency. It justifies business tax deductions, updates and organizes business records and audit proofs your business so that you save money.